Co-Tenancy Clause: What It Is, How It Works, Landlord Conditions

James Chen, CMT is an expert trader, investment adviser, and global market strategist.

Lea Uradu, J.D. is a Maryland State Registered Tax Preparer, State Certified Notary Public, Certified VITA Tax Preparer, IRS Annual Filing Season Program Participant, and Tax Writer.

What Is a Co-Tenancy Clause?

A co-tenancy clause in retail lease contracts allows tenants to reduce their rent if key tenants or a certain number of tenants leave the retail space. A large or key tenant is a big draw for traffic, especially in malls. It's often one of the major reasons why a tenant chooses to locate in a specific mall. A co-tenancy clause provides the tenant with some form of protection in the form of reduced rent to compensate for a potential loss in traffic.

Key Takeaways

• A co-tenancy clause is like an insurance provision that safeguards against the financial impact on other tenants that can be felt when a key tenant leaves a retail space.
• Other tenants can suffer a lack of traffic and reduced income when a key tenant leaves the space or mall and is no longer drawing in potential customers.
• Retail businesses with a co-tenancy clause can be compensated by a rent reduction.
• Landlords are often opposed to these clauses because they can cost them a fair bit of revenue.
• Landlords can set their conditions for agreeing to a co-tenancy clause.

Understanding the Co-Tenancy Clause

Co-tenants are typically the anchor tenants in a mall. They're the large, popular stores that attract increased traffic that spills over to other stores in the same location.

Landlords usually end up losing a lot of revenue when some retailers are forced to close these outlets to shave costs in times of economic stress.

Exercising co-tenancy clauses further amplifies the loss of revenue as remaining tenants demand a reduction in rent. The stress of this could ultimately lead to bankruptcy.

A co-tenancy clause is usually a hotly negotiated item in a retail lease. Landlords dislike co-tenancy provisions because they can't control the actions of other tenants or occupants in the shopping center. They believe a certain number of vacancies is unavoidable and their revenues from the shopping center can be severely impacted by a co-tenancy clause.

Whether a tenant obtains a co-tenancy clause is largely dependent on their negotiating leverage. Landlords seek national and large regional tenants because of their name recognition, their ability to pay higher rents, and their staying power. They're also desirable because of their drawing power and their ability to raise the public profile of a shopping center. These tenants are in a better negotiating position to get co-tenancy protection than smaller tenants.

Common Landlord Conditions for Co-Tenancy Clauses

A landlord will usually want a tenant to satisfy certain conditions in order to obtain a co-tenancy provision in a lease. The biggest condition is often a stipulation that the tenant cannot be under default on the lease if they wish to invoke a co-tenancy clause.

A landlord may also require that the tenant show evidence of a drop in sales during the co-tenancy violation period as compared to the period before the violation. A landlord will also want to make sure that there won't be multiple remedies allowed under the lease for such a violation if the tenant invokes a co-tenancy provision. A landlord doesn't want to be in a situation where the tenant obtains the benefit of a co-tenancy violation remedy and then sues for other damages.

What Is a Force Majeure Clause and Is It the Same as a Co-Tenancy Clause?

A co-tenancy clause is similar to a force majeure clause in that a force majeure clause also insures against loss due to a circumstance that's outside a retailer's control. But a co-tenancy clause is tied specifically to an anchor tenant in a mall or retail space whereas a force majeure clause event can be almost anything that disrupts business. The COVID-19 pandemic resulted in numerous applications of force majeure clauses.

What Is a "Go Dark" Provision in a Lease?

This provision allows a retail tenant to close its doors, stop operations, and "go dark" without defaulting on its lease provided that it's current with rent, continues paying rent, and meets all other lease obligations. It can trigger the terms of a co-tenancy clause if the tenant ceases operations and is no longer bringing in traffic.

What Is a Co-Tenant in a Residential Lease?

Unlike a co-tenant in a retail space, residential co-tenants tend to occupy the same unit. They jointly sign the same lease. Each is individually responsible for paying 100% of the rent if the other doesn't pay.

The Bottom Line

A co-tenancy clause protects the tenant, not the landlord. It addresses an issue over which the landlord has very little control: whether a key tenant will close its doors and vacate. But the clause can be a lifesaver for tenants who have lost business and traffic because another tenant vacated.

Consider consulting with a real estate attorney if you think one of these clauses could aid your small business. You'll most likely need assistance in reaching an agreement on a co-tenancy clause with your landlord.